Content distribution pure plays pressured
Content distribution, hailed as a paradigm-changing technology six short months ago, might prove instead to be a speedy road into business failure for some of the companies that started the craze.
At the same time, customers crave such services that bring information closer to users through the use of shared infrastructure. Use of content distribution networks is expected to grow 30 percent this year; customers spent $1.3 billion on the services and equipment in 2000.
Ironically, the booming demand may be part of why companies specifically targeting content distribution are hurting. Web hosters and big network service providers are crowding into the field and may be squeezing out the pure plays. Content distribution may end up being part of a suite of services offered to corporate customers, not a stand-alone function. Companies that survive are likely to build alliances, such as the one that Akamai Technologies and Oracle are expected to announce today.
The flux is confusing business customers, however, as they are forced to evaluate not only the fit between their needs and the services offered, but also the longevity of their potential partners.
"What you want to do in this environment is to pick a winner in each category of companies selling the service," said Peter Christy, an analyst at Jupiter Media Metrix.
What powers the new field is the fact that the Internet doesnt work properly for many businesses that seek to use the network of networks commercially. Thus hundreds of enterprises, seeking to improve performance of their Web sites and applications, buy these specialized services.
Content distribution allows users to share centrally managed infrastructure that puts content closer to its users, saving them the cost of building their own facilities.
"The growth comes from two areas: There will be a little bit of growth in content delivery networks, as more traditional entertainment and media properties continue to ramp up their online business, and as these CDNs move into enterprise. Also, there will be more technology sales with caching appliances, reverse proxy caches and so forth," said Ben Elstein, an analyst at Aberdeen Group.
Elstein recently wrote a report forecasting the content delivery market will grow to $6 billion in 2005.
Young companies sprouted quickly to meet the need. Akamai, which helped shape the field, is still standing tall. The company is promising profitability in the near future and, until recently, inspired scores of imitators.
A number of Web hosters got into the business, following early competitor Digital Island most notably the worlds largest Web hoster, Exodus Communications. And vendors, like Inktomi, selling content distribution technology promise not only to enable any business or network to move bytes to the edge with their boxes, but also offer to manage these local networks through alliances.
Solid as a Rock
Analysts, including Christy, point out that the business is based on a solid economic foundation. Once facilities are built, it is more economical to share them rather than build new infrastructure. Buyers of such services cant agree more.
"The only reason we got into this service is because we needed worldwide colocation presence and could not afford to build it," said Ken Reiff, director of product management and business development at network monitoring vendor Open Systems.
Open Systems uses the content distribution services of partners Mirror Image and Exodus to cut bandwidth costs of distributing its software internationally over the Internet.
"When you pick up a phone and hear a dial tone, its more noticeable that its not there than if its there, and similarly, you are going to notice more that content distribution is not there than that it is," said Scott Emo, director of product marketing at Exodus. He predicts content distribution will be used with virtually all Web-based applications in 2002.
However, the projected growth wont be the tide that lifts all ships, as time seems to have run out on companies that failed to develop their businesses before competition caught on.
"We dont have a dozen CDNs left anymore," Elstein said, referring to a recent default of Edgix, as well as the deathwatch of Adero, which is expected to run out of cash by the end of this year.
Rangu Salgame, president and CEO of Edgix, blamed his companys default on the market timing and continued deterioration and turmoil among his telecommunications customers.
Al Fink, Aderos general manager, said the company is looking for venture funding to make it through the year, aiming to hit the breakeven point in 2002 if more funds are secured.
Even the big kahuna, Akamai, is feeling the pinch. The company saw its shares drop from a dazzling peak of $350, just hours after its Nasdaq debut in October 1999, to a new low of $5.50 on April 5. The companies that predate content distribution companies with bandwidth-saving, performance-increasing business models like iBeam Broadcasting and Cidera are also seemingly in a tailspin. iBeam announced layoffs last week. Cidera is going through internal "repositioning," and layoffs are rumored as well.
Analysts who have followed the sector from the outset said the shift has to do with tectonic changes in the Internet industry. Troubles in the New Economy brought upheaval into the entire industry, forcing most service providers to change their focus to sell services to enterprise interactive technology managers rather than to dot-coms.
Akamai, for one, rapidly responded to these new market conditions with the launch of its EdgeSuite product line, touting hardware savings and network management simplification instead of speedy content delivery.
In its new alliance with Oracle, Akamai expects to provide edge-server architecture to Oracle for its 9i application server product. The deal could save businesses using databases in conjunction with their Web sites up to 75 percent in hardware costs, executives said.
Akamai and Oracle also plan to announce today a new programming language that would enable more application developers to link into both the Akamai network and Oracles software, bringing additional revenue to both companies.
EdgeSuite is the service that would take Akamai to a new level of revenue, from $90 million last year to $200 million this year, according to company Chief Technology Officer Denny Lewin.
Wall Street has yet to be impressed with the execution of this plan.
"This is a major product transition, which often takes time," said UBS Warburg analyst John Hodulik, who recently lowered his recommendation on the stock from buy to hold. With EdgeSuite costing up to 10 times as much as Akamais existing streaming services, EdgeSuite could end up being a tough sell, which is one of Hoduliks concerns.
Another concern is competition everybody from Exodus to Inktomi seems to be in the content distribution business these days. Hodulik and other analysts, like Christy and Elstein, anticipate Akamai will be one of the few remaining independent content distributors. They say large Web hosting companies like Exodus and big carriers like AT&T, Cable & Wireless and WorldCom will carve up the rest of the competitive landscape.
Default instead of acquisition is a likely future for less successful companies. Executives such as Vint Cerf at WorldCom and Justin Jaschke at NTT Verio both said they dont see much value in independent content distributors. Existing projects among big carriers, like AT&T, also appear to be frozen.
"I am still scratching my head about content distribution networks. . . . The idea of doing something special to do distribution seems applicable when the bearing network doesnt have enough capacity or speed," Cerf said in a January interview. WorldCom has since formally put investigating CDN services on its "to do" list, but there are no imminent service launch plans.